'Open procurement should be the MoD's default position'

29 August 2012

Minister for Defence Equipment, Support and Technology Peter Luff talks with DMJ Editor Anthony Hall about the recent white paper and sourcing equipment in the UK…

The publication of the National Security Through Technology: Technology, Equipment and Support for UK Defence and Security White Paper in February focused attention on the MoD's relations with the British manufacturing industry. The white paper sought to encourage new ways of engaging with overseas suppliers of defence and security equipment, consequently channelling investment into the UK defence and security sectors, and in particular into SMEs. However, the subsequent decision to award the MARS tanker contract to Daewoo Shipbuilding and Marine Engineering (DSME) in South Korea has been highlighted by Shadow Defence Secretary Jim Murphy as "bad news for British industry".¹

Minister for Defence Equipment, Support and Technology Peter Luff argues that the MARS procurement was an "almost perfect illustration of the white paper concepts".

"The paper's default position is open procurement. It is about buying equipment both internationally or nationally in global competition where that makes sense. Interestingly enough, the MARS procurement was begun by the previous government, and I strongly support the approach it took. It recognised that when you buy a tanker rather than a warship, the right place to look is through international competition."

The MARS procurement took place in a world where only three countries actively build tankers: Japan, Korea and China. "It was therefore almost inevitable that the contract would go to one of those three, although China would have been a little more challenging," he says, rejecting criticism that the construction contract should have simply gone to a UK company instead. "There was no British bid at the end of the process, because Britain, sadly, no longer builds tankers, and the only other European bid was hundreds of millions of pounds more expensive." He makes the point that global oil companies, such as Shell or BP, wouldn't buy a tanker from the UK because they can't – they would buy them from Korea or Japan, as the MoD has done.

Despite this, the design for the tankers is British, and £150m of systems engineering and support work has gone to UK companies – a method of procurement that continues due to existing policy. "When you buy equipment off-the-shelf or overseas – as we've seen with Urgent Operational Requirements for Afghanistan – a lot of work is done back in the UK or UK equipment is used. Classically, for example, the armoured vehicles that we sourced from America and Singapore have been brought into the UK, where British equipment has been added by British workers using high indentured skills. The machine may be bought overseas, but so much added value occurs in the UK." As a consequence of this, even when equipment is bought off-the-shelf, there are opportunities for British business. Moreover, in practice, off-the-shelf equipment is normally modified in this manner – which again returns to the issue of sovereign capabilities. Sometimes, off-the-shelf means competition and sometimes it doesn't – for example, the recently purchased C-17 doesn't have a competitor.

Off-the-shelf, no matter how the process operates, is always qualified by the principle of technological advantage. "This is where we have a sovereign requirement on either operational grounds or in terms of freedom of action, which often means sustaining or replacing equipment where we are not constrained by availability from an overseas supplier who might cut off the supply at a time of conflict, for whatever reason," Luff explains. Moreover, he describes the open procurement principle defined in the white paper as: "Tempered by the principle of technical advantage – that is the overall strategy." Furthermore, it also commits the government to support for exports, sustaining current levels of spending on science and technology, and strong support for the SME community.

"The government has a commitment to support SMEs, because we believe that the SMEs of today will be the medium and large-sized companies of tomorrow," Luff says, adding that in defence, SMEs bring their own advantages. "It is quite clear that in the very innovative, hi-tech world in which we live, quite often the solutions we need come from hi-tech firms. SMEs, in general, are more responsive to the MoD's needs than the big behemoths that large organisations can often be."

The white paper identifies categories of action to engage the SME community, as the Minister details: "The cultural changes we seek to make and action we can take with the primes to encourage them to take this strategy seriously. There are also a number of initiatives already under way in terms of advertising opportunities, pre-qualification questionnaires, and strict turnover rates that used to debar companies from bidding."

The work is ongoing, but Luff identifies the most important aspect as: "Making people understand that there is no killer blow that will resolve the challenges of MoD understanding SMEs and vice versa. There are also thousands of SMEs that we could engage with and we are a big, highly structured bureaucratic organisation." Both SMEs and the MoD are complex, and thus building working partners will be a real challenge. "It will be a series of small actions that will cumulatively change things significantly."

An integral part of this work has been establishing the SME Forum. Chaired by Luff, the forum brings together manufacturing organisations, including NDI, ADS, EEF, Intellect (the technology association) and the Federation of Small Businesses, and is an initiative that the Minister has high hopes for. "What I want to do is to have an ongoing dialogue with the SME community to ask them what we are doing wrong that we should be doing differently," he declares. Communication is crucial to improving relations with SMEs, because often a misunderstanding of the department's processes leads to accusations and complaints, although Luff admits that quite often they are fairly well founded. However, Luff clearly articulates the message currently ringing out of the MoD: "This government is serious about the SME community engagement process – deadly serious – and this policy is now getting into the DNA of the department."

Other partnership news from within the MoD in recent months has highlighted the work of organisations such as Niteworks, which earlier this year announced its 100th member company, the Centre for Defence Enterprise (CDE), which has been established through Dstl. "I'm very pleased with both Niteworks and CDE, who are one of my crown jewels," states Luff. "However, I think they both need to make sure they are doing what we want them to do with regard to SME engagement, and there are practical ways of achieving that for CDE. I also want to be reassured that Niteworks is being of benefit to the SME community, and not just serving the larger companies. The growing membership suggests to me that it is doing that, and it should do that, but I want to make sure absolutely sure it is delivering the benefits it needs to." These include providing a place in which intellectual property can be freely shared without risk of compromising ownership, which is one of the areas of complaint at SME-level. "Often, this is difficult to prove by the way that IP has in some sense been abused by the MoD or private contractor." There are very few case histories that are proven, but the fear is there, and will inhibit SMEs from engaging.

The work of building SME relations and the MoD's future engagement with industry will be framed by the Materiel Strategy and the restructuring of DE&S, and Luff is clear about the fundamental importance of these organisational changes. "We have to improve the skills and processes of DE&S, which will probably require a private sector partner to drive it at the speed we want it to go. We also need to put in a better boundary between DE&S and the department, which will create a proper customer-supplier relationship that doesn't really exist at present." At the moment, the process lacks discipline, and there are debilitating costs from nugatory activity, unreasonable demands and changes in specification.

"We must get this right; we can't get it wrong or rush it," says Luff. "A great deal of what DE&S already does is done very well, and a lot of the problems that they have are actually because the department keeps changing its mind, making all these demands and setting impossible tasks for them. So, getting that disciplined relationship in place is actually rather important."

¹www.labour.org.uk/lose-to-france-fast-jets-lose-out-south-korea-royal-navy-tankers,2012-02-22